From msnbc.com's Tom Curry: When a debtor’s borrowing costs start to exceed what he spends on necessities such as food and medical care, it might give him pause.
Likewise, to understand the federal government’s growing debt problem, consider these two items from President Obama’s Office of Management and Budget (OMB), presented Monday in the president’s fiscal year 2012 budget proposal:
Last year, taxpayers spent more than twice as much on the Medicare program as they did on interest payments on federal debt.
But starting in 2018, the federal government will pay more in interest costs than it will spend on Medicare, the health insurance program for the disabled and people age 65 and older. (The OMB excludes from its calculation the premiums that Medicare beneficiaries pay; it includes only what taxpayers pay for the program, which covers 80 percent if its costs.)
Analysts have long cited Medicare as the prime example of the relentless federal spending growth. For 30 years, Medicare has been growing faster than America’s national income.
So if the cost of paying interest on the money the government borrows will soon exceed Medicare spending, that will be a cold bucket of water in the taxpayer’s face. More and more tax revenue will be going to pay for the privilege of being allowed to borrow more and more money.
According to the OMB, interest costs will go from almost 6 percent of total federal outlays in 2010 to nearly 15 percent in 2020.
“Huge deficits plus the assumption that interest rates will rise modestly are causing forecast interest costs to explode,” said former Congressional Budget Office director Rudolph Penner. “Consequently, we are sending money to foreign investors and domestic capitalists that could be much better used for other things.”
A debtor borrows because his current income falls short of his wants. Likewise for the federal government, there’s simply not enough income, or revenue. For the entire ten-year forecasting period in Obama’s budget proposal, revenues lag far behind spending.
The debt problem will also be driven by what Penner referred to: higher interest rates in the years ahead. Morgan Stanley economist Richard Berner told the Senate Budget Committee at a recent hearing, “We enjoy low interest rates. And we enjoy favorable borrowing terms right now. But, of course, that's going to run out.”